Assignment : applied economics

Sunmitted by : zoya aziz bajwa

RBS18-05
Submitted to : maam asma awan
Remittances
Issues
1. Remittances can decrease the labour pool and foster a culture of dependency, which hinders
economic development. Remittances can harm the competitiveness of the receiving countries
in international markets by raising the consumption of non-tradable commodities, increasing
their prices, appreciating the real currency rate, and reducing exports.
2. Factors behind the current surge in worker migration and higher skill levels of migrant
workers that have driven remittance flows into Pakistan. Remittances have recently grown to
be a significant source of inflows for Pakistan, and there are currently no signs that this trend
is going to reverse. Instead, factors such as the skill level of immigrants, investment returns in
both Pakistan and the host nation, exchange rates (both real and nominal), and the economic
situation in Pakistan are in explaining remittances.
3. After FDI, worker remittances are the second-largest source of funding for developing
nations. Workers remittances significant with GDP growth and playing active role in Pakistan
economy.
Literature 1
Mansoor and Quillin (2006) stated that the main remittance receiving countries are
developing countries; consequently, developing countries are in the process of conversion of
their current infrastructure with a newly developed setup, demographics and a secure
government organization setup. Mughal and Makhlouf (2013); Adams and Page (2005);
Jongwanch (2007) stated that remittances have a positive effect on the economic growth of
developing economies. The examined results indicated that remittances from foreign
countries have a negative effect on the recipient country’s labor force.
Khawaja and Hiranya (2010) examined the effect of remittances on the economic growth. The
examined results showed that remittances have a positive and effective impact on the
economic growth and on the per capita growth.
Anyanwu and Erhijakpor (2010) classified the impact of remittance inflow into national,
community and household level perspectives. The examined results indicated that remittances
help to reduce poverty through household income and consumption. Ratha (2003) and Imai et
al., (2014) examined the effect of remittances on the economic growth. The examined results
indicated that remittance inflow boosts the saving and the investment. The authors stated that
remittances have an effective impact on the economic growth and remittances are probably
spent on the consumption of domestically produced goods.
Rodrick et al., (2008) examined the effect of remittances on the economic growth of
developing countries. The examined results indicated that remittance inflow has a positive
and nonsignificant effect on the economic growth of developing countries. Wouters (2010)
scrutinized the impact of remittances on poverty reduction growth is unclear. Chami et al.
(2005) examined the impact of remittances on economic growth for different countries by
using panel data. The examined results indicated that remittances have a negative impact on
the economic growth. Grabel (2009) stated that the political system of any country can affect
the inflow of remittances. This situation happens whenever the migrant families or
administration of the home country reduce the struggle toward improving the economic
growth. However, migrant families directly depend on remittances as a source of income that
is mostly used to fulfill daily life consumption. Use of remittances for daily consumption
causes the decrease of economic growth of the home country.
Fayissa and Nsiah (2010) examined the impact of migrant remittances on the economic
growth of African countries. The examined results showed that remittances have a positive
and significant effect on the economic growth of African countries. Waheed and Aleem
(2008) examined the effect of migrant's remittances on the economic growth of Pakistan. The
examined results showed that remittances have a positive and significant effect on the
economic growth of Pakistan in the short-term. Rapoport (2002) stated that remittances are
utilized as a source of finance for human and physical capital investment.
Gapen et al., (2009) used ordinary least squares OLS and the fixed effect model; Catrinescu et
al., (2008) used OLS; Cruz Zuniga (2011) used panel VAR; Ramirez (2013) applied FMOLS;
and Hargreaves (1994) and Marwan et al., (2013) used the Johansen cointegration technique
for checking the long-run effect of remittances on economic growth. One of the major
problems with the Johansen cointegration technique is that it requires a large number of
observations for analysis.
This paper contributed to the literature in two ways. First, little empirical research has been
done on how remittances affect economic growth and vice versa, directly social welfare and
inequality in Burkina Faso by using the Gini coefficient and concentration coefficient
decomposition approach. The examined results indicated that remittance inflow decreases
income inequality, remittances increase the inequality gap in Burkina Faso while remittances
help to decrease the level of poverty. Siddiqui and Kamal (2006) investigated the role of
decline in remittance inflow with trade liberalization shocks on the poverty and welfare in
Pakistan. The examined results indicated that a decrease in remittance inflow to Pakistan led
to an increase in poverty levels.
Literature 2
The literature on remittance behavior at the individual level identifies two motives for
remitting: altruism or self-interested exchange (see for example Johnson and Whitelaw (1974)
for reference on altruism, and Lucas and Stark (1985), Hoddinott (1994) for modeling
remittances as a self-interested exchange from the remitter since family left behind provides
certain services—child care, financing of emigration, agents for tending left behind
businesses, among others). These two motives can be operative simultaneously in a remitter’s
decision to remit, while the work of Becker (1991) on merit goods provides a theoretical
framework for a more unified analysis (see also Chami (1998) and Mulligan and Philipson
(2000)). A particularly important relationship between remitter and relatives in the home
country is protection from income shocks which can be in both directions. For example, Yang
and Choi (2007) show that agricultural families in the Philippines use remittances to
compensate for income shocks, while in Amuedo-Dorantes and Pozo (2006), the family
provides insurance to the remitter, with the remittances as the insurance premiums.
Regardless of the motive to remit, the amount remitted is determined by the economic
fortunes of the remitter and the recipient, among other variables. Economic growth in the host
country is often used a proxy for the economic fortune of the remitter, with higher growth
leading to higher remittances. Similarly, economic growth in the home country is used as a
proxy for the recipient’s economic fortune, with lower growth leading to higher remittances.
Another important factor that drives remittances is the real value of remittances—which
depends on the exchange rate (including black market exchange premiums) and inflation in
the recipient’s country—because it is the amount of real resource represented by remittances
that has a direct bearing on the recipient’s welfare. Many empirical studies also include
factors that affect the opportunities available for use of the remittances, which may include
financial variables such as interest rates in the home country and proxies for political risk.
Either by design or by omission, many existing empirical studies are limited to analyzing
remittances using aggregate level data to explain essentially individual behavior, namely the
motivation of the individual remitter to remit. For example, most studies focus on which
macro-economic variables affect the total amount of worker remittances and by how much—
sometimes scaled in either host or home countries’ GDP. This deficiency seems to reflect to a
large extent the paucity of micro data on remittances.
Literature 3

Impact of remittances on economic growth and poverty

Abdul Qayyum Professor/ Registrar Pakistan Institute of Development Economics,
Islamabad Muhammad Javid Staff Economist Pakistan Institute of Development
Economics, Islamabad and Umaima Arif Pakistan Institute of Development Economics,
Islamabad
Summary
Key issues
The significance of remittance inflow and its implications for Pakistan's economic
development and alleviation of poverty.
Methods and databases used
ARDL approach is used to analyse the impact of remittances inflow on economic growth and
poverty in Pakistan for the period 1973-2010. District wise analysis is done of all provinces.
Two different models of Remittances and Growth, and Poverty and Remittances are used to
deal with remittance growth and poverty.
Key results
Remittances have a beneficial and considerable impact on economic growth, according to
empirical research. The study also discovers that remittances have a considerable and
statistically significant influence on reducing poverty, indicating that poor people in
developing nations like Pakistan may gain significantly from international migration.
Implications of the results
The impoverished in emerging nations like Pakistan stand to gain significantly from
international labour migration. As remittances' effects expand and grow over time, they may
eventually result in sustainable growth, an improvement in poor households' welfare, and
their upgradation. In order to increase the volume of remittances, the government should
create a policy that lowers the transaction costs associated with transferring remittances
through official channels.
Research gap
Even though there has been a lot of research done in this area, more study is still needed
before an overall conclusion can be made about how desirable international remittances are
for economic growth and poverty reduction.

A time series analysis of role of worker’s remittances in economic

growth of Pakistan
Noreen Safdar1 , Malka Liaquat1 (malka.liaquat@wum.edu.pk), Benish Amjad2

Summary
Key issues
investigating the contribution of employee allowances to Pakistan's financial development.
The influence of foreign allowances on the growth of Pakistan economy.
Methods and databases used
In this study, time series data from the Word Development Indicators (WDI) for the years
1980 to 2016 are used.
Secondary data were used in this analysis. In this study, the following variables were used:
GDP, TOP, REM, MVA, GS, and GDPD. ADF test, Autoregressive distributed lag model,
descriptive statistics, correlation matrix, and bound test are the approaches used in this study.
Augmented Dickey Fuller test is used to examine stationarity of all variables.
Key results
Remittances have a positive and large impact on the economy's growth, whereas FDI,
manufacturing value added, saving, and the GDP deflator also have positive and significant
effects. Trade openness has a positive but negligible effect on development.
Implication of results
Allowances play a crucial role in accelerating the economic development of less developed
governments by facilitating the transfer of money and resources from developed to
developing nations. Pakistan should transfer labour to nations with superior technology since
it will have a positive and significant impact on Pakistan's economy.
Research gap
The study's findings have implications for policy that will increase the effectiveness of
remittances and help Pakistan's economy. Which are not discussed in previous studies which
is the research gap filled in this study.

Question 1
How foreign remittances affect economic growth in Pakistan
Articles
1) The Effect of Migrant Remittances on Economic Growth: an ARDL
Approach.
2) Foreign Remittances and Economic Growth in Pakistan: An empirical
investigation
3) EFFECTS OF REMITTANCES ON PERCAPITA ECONOMIC GROWTH
OFPAKISTAN
4) Impact of remittances on economic growth and poverty
5) The nexus of remittances and economic growth: An experience of Pakistan 1973-
2015.

No year Cros Anal obser Depe Inde Cont meth findi Liter
of s ysis vatio ndent pend rol odol ngs ature
articl secti level ns varia ent varia ogy gap
es on ble varia ble
ble
1 2019 Pakis Time 1976 GDP migr No Exa Remi Diffe
tan serie - ant contr mini ttanc rent
s 2016 remit ol ng es to macr
analy tance varia the Pakis oeco
sis inflo ble short tan nomi
w - and are c
perce long- mostl varia
nt of term y bles
GDP impa used whic
, cts of for h
forei work inves were
gn er tmen ignor
 direc remit ts, ed in
t tance whic previ
inves s on h ous
tmen Pakis contr studi
t tan's ibute es
inflo econ to are
w omy the empl
perce requi count oyed
nt of red ry's in
GDP the econ this
, use omic study
exch of progr .
ange the ess.
rate, ARD
inflat L
ion, appr
cons oach.
umer
price
2 2013 pakis Annu 1978 GDP FDI, No ADF
tan al - , inflat contr test
time 2011 forei ion ol is
serie gn and varia used
s remit exch ble to
tance ange chec
s rate. k the
statio
narit
y of
varia
bles.
Least
squar
e
techn
ique
is
appli
ed.
OLS
techn
iques
used
to
chec
k the
relati
onshi
p
betw
 een
IV
and
DV.
3 2016 pakis Time 1976 GDP remit inves Auto The
tan serie - tance tmen regre analy
s 2013 t ssive sis
distri foun
butiv d a
e lag statis
boun ticall
d of y
testin signi
g fican
mode t
l benef
used icial
to long-
see term
affec and
t of short
remit -term
tance impa
on ct of
per remit
capit tance
a s on
econ Pakis
omic tan's
grow per
th. capit
a
econ
omic
grow
th.
4 2012 pakis ARD 1973 pove Remi No ADF Inter
tan L - rty ttanc contr is natio
appr 2010 es, ol used nal
oach, GDP varia to migr
micr ble chec ation
o k the ,
level order Remi
of ttanc
integ e
erati inflo
on to w,
find welfa
the re
relati impr
 onshi ovem
p ent
betw and
een upgr
varia adati
bles on of
throu poor
gh hous
coeff ehold
icient s,
and remit
integ tance
erati broa
on den
test. and
enlar
ge
over
time.
5 2015 Pakis Time 1973 GDP Cons No For Ther To
tan serie to umpt contr testin e is a analy
s 2015 ion, ol g signi se
analy capit varia statio fican the
sis. al ble. narit t data
inves y, the relati and
tmen Aug onshi draw
t, ment p concl
gove ed betw usion
rnme Dick een s,
nt ey econ comp
spen Fulle omic lete
ding, r test grow infor
expo was th mati
rts. appli and on
ed. remit on
Ordi tance the
nary s. volu
Least One me
Squa perce of
re nt remit
(OLS incre tance
) and ase s
Vect in recei
or remit ved
Error tance and
Corr s how
ectio leads they
n to are
Mod 0.5 used
el perce shoul
 (VE nt d be
CM) incre gathe
techn ase red.
iques in
for GDP
estim .
ating
unkn
own
para
mete
rs.

Question 2
Why remittances in Pakistan have gone up in recent years
Articles
Remittances in Pakistan—Why have they gone up, and why aren’t they coming down?
Question 3
What are the impacts of worker’s remittances on GDP growth of Pakistan
Articles
1) A Way towards Economic Growth in Pakistan: Role of Worker’s Remittances
Revisited.
2) Worker’s Remittances and GDP Growth in Pakistan.
3) Impact of Workers' Remittances on Economic Growth: An Empirical Study of
Pakistan’s Economy.
4) A time series analysis of role of worker’s remittances in economic growth of
Pakistan
5) The Contribution of Workers’ Remittances to Economic Growth in Pakistan
No year cross Anal obser Depe Indep Contr meth findi Liter
of - ysis vatio ndent ende ol odolo ngs ature
artic secti level ns varia nt varia gy gap
les on ble varia ble
ble
1 2017 Pakis Annu 1976 GDP Work No Empi Forei Lates
tan al - er's contr rical gn t
time 2013 remit ol regre remit techn
series tance varia ssion tance iques
s, ble. mode s of
FDI, l is affect error
GDP used. ed corre
The positi ction
relati vely and
onshi and not
p signif used
betw icantl in
een y in this
 the pakis resea
depe tan. rch
ndent litera
and ture.
indep
ende
nt
varia
bles
in the
regre
ssion
analy
sis is
meas
ured
using
the
OLS
meth
od.
2 2014 pakis Annu 1973 Pakis Work Worl GM wor GM
tan al - tan's er's d M ker M
time 2011 GDP remit GDP meth remit meth
series tance edolo tance od
analy gy s used
sis. and have to
OLS a contr
redre positi ol
ssion ve endo
estim and genie
ation consi ty
is derab probl
used. le ems ,
impa whic
ct on h is
GDP not
grow used
th in
and previ
have ous
a big studi
econ es.
omic
impa
ct in
Pakis
tan.
The
finan
 cial
secto
r has
a
simil
ar
positi
ve
and
large
impa
ct on
GDP
grow
th as
trade
open
ness
and
globa
l
GDP
grow
th.
3 2013 pakis Time 1991 GDP Work No Prod Ther Com
tan series - ers contr uctio e is a parati
analy 2012 remit ol n signif ve
sis tance varia funct icant study
, ble ion positi can
empl regre ve be
oyed ssion relati cond
labor mode on ucted
force l has betw for
, been een differ
gross used work ent
fixed in ers devel
capit this remit oping
al study tance count
infor and ries
matio eco using
n. grow panel
th in data.
pakis Edu
tan healt
ha nd
pover
ty
stand
ards
shoul
 d be
used
to
see
the
overa
ll
effect
.
4 2016 Pakis The 1980 GDP REM NO ADF Remi
tan regre - TOP contr is ttanc
ssion 2016 FDI ol used es
analy varia to have
sis of ble deter affier
time mine mativ
series atatioe
narit signif
y of icant
varia influ
ble. ence
ARD on
L grow
mode th
l is econ
appli omy
ed to other
find FDI ,
out manu
the factu
resultring
s due value
to adde
mixe d ,
d savin
order g ,G
of DP
integ deflat
eratioor
n. has
signif
icant
influ
ence
on
grow
th of
econ
omy.
5 2005 pakis Time 1972 Real WR NO a The comp
tan series -73 GDP IG simpl quant utabl
analy to grow IP e itativ e
sis 2002 th INF grow e gener
-03. ED th evide al
mode nce equili
l show briu
used s that m
to real mode
captu GDP l) to
re the grow see
impa th is how
ct of positi the
work velyr work
ers’ elate ers’
remit d to remit
tance work tance
s on ers’ s
real remit contr
GDP tance ibute
grow s d to
th in durin outpu
Pakis g t
tan 1972 grow
-73 th
to and
2002 in
-03. their
Work absen
ers’re ce,
mitta how
nces it
appe woul
ared d
to be have
the affect
third ed
impo grow
rtant th
sourc and
e of in
capit turn
al for pover
econ ty in
omic Pakis
grow tan.
th in
Pakis
tan.
Research proposal
Foreign remittances and economic growth: a case study of Pakistan
Introduction
Foreign workers' remittances are that portion of emigrants’ earnings
which are sent by exported labours to their family members in the home country. Economic
growth means an addition to the entire production of
visible and invisible items in the country in a specific span of time. For
the last few decades, remittances have gained great importance in the
economies of developing countries and there is a common opinion that
remittances have an encouraging relationship with economic growth of
these country. They are very important attribute of labour movement to
the labour-sending countries. They have encouraging effect on the main
major economic variables such as payments' equilibrium, expenditure,
capital formation, aggregate demand and hence the economic growth
(Tansel & Yasar, 2010; Javed et al., 2012). The inflow of official
remittances to developing countries has attained the figure of $528
billion while the worldwide remittances have touched the figure of $689
billion in 2018. They are expected to touch $549 billion to developing
countries while $715 billion globally by 2019 (World Bank, 2018).
Remittances, which generally accrue from the prosperous nations to the
emerging nations, are an important source of foreign exchange earnings
from exported labour. The labour-sending countries have been assisted
considerably by remittances in achieving more economic growth.
Remittances have enabled the labour-sending countries to rely less upon
international borrowing (World Bank, 2008). Remittances also take great
part in the alleviation of poverty from the developing countries like
Pakistan through its employment and income generating activities. They
grant financial support to the poor masses of the country against various
financial hardships. They also increase purchasing power of the people,
which assist them in various investment activities like human capital,
small business and property. Similarly, they also increase their
consumption demand for various goods and services.
Literature review

An appropriate understanding of remittance and growth relationship can help policy

makers to design a suitable economic policy. Giuliano(2008) finds that remittances boost
growth in countries with less developed financial system as it provide an alternative way
to finance investment and reduce liquidity constraints. Workers remittances also play an
important role in human capital investment in the recipient country through relaxing
resource constraints. Calero (2008) explored that remittances increases school enrollment
and decrease the extent of child work. Moreover the study finds that remittances are used
to finance education when households are facing aggregate shocks as these are associated
with increased work activities. International remittances also perform an important role in
reducing the extent of inequality and poverty. Acosta et al (2007) presented the
household survey base estimates for 10 Latin American countries which confirmed that
remittances have negative though relatively small inequality and poverty reducing
effects.
Jongwanich (2007) examines the impact of workers remittances on growth and poverty in
Asia-Pacific developing countries. The empirical evidence shows remittances have a
significant impact on poverty reduction and trivial impact on growth. Burgess and Vikram
(2005) examine the different channels through which remittances can affect
economic activity. The study does not clearly support the short term stabilizing effect on
consumption, however the longer term economic effect of such flows seems to be
ambiguous. Catrinescu (2006) explored that remittances exert a weakly positive
impact on long term macroeconomic growth. Furthermore the study also supports the
idea that development impact of remittances enhances in the presence of sound
macroeconomic policies and institution.
Fayissa and Nsiah (2008) argued that remittances enhance economic growth in countries
where financial systems are not very strong by providing an alternative way to finance
investment and help to overcome liquidity constraints. Iqbal and Sattar (2005) shows that
real GDP growth is positively correlated to workers’ remittances during 1972-73 to 2002-
03 and workers’ remittances emerged to be the third important source of capital for
economic growth in Pakistan.
Adams and Page (2005) used the data of 71 developing countries in their study on
remittances, inequality, and poverty and concluded that remittances significantly reduce
the level, depth and severity of poverty in the developing world. Lucas (2005)1 argues
that remittances probably contributed in a significant way to poverty alleviation process
in case of Pakistan.
The impact of remittances on economic growth and poverty has been an extensively
discussed issue both among academics and policy makers. Although this area of research
has been explored extensively and widely, yet further research on this issue is still
required to arrive at overall judgment related to the desirability of foreign remittances for
economic growth and poverty reduction. On the basis of literature related to affects of
remittances on growth and poverty, we can summaries the following main channels
through which remittances enhance growth and ultimately reduce poverty in remittances
receiving economy
Conceptual framework
The research design of this study will be extraordinarily impacted by the works of
Karagöz (2009). The exploration will try to give a clarification on the connection between
workers' remittances and economic development. An illustrative outline will help us give a
clarification on the affiliation between workers' remittances and economic development. The
study will cover one and only nation, for this situation Pakistan.
This study will depend absolutely on secondary yearly time series information. The
information will be gotten from the World Bank database and handbook of statistics. The
examination of the information will be completed by OLS (Ordinary Least Squares)
technique.

Methodology
On the basis of literature review the model to study the impact of workers’ remittances on
economic growth has
been derived from the production function framework. The same model has been drived and
used by Waheed
and Aleem (2008), Jawaid and Raza (2012), and Iqbal and Sattar (2005) The production
framework is:
Y= f (A, L, K)
Here “Y” represents the gross domestic product (GDP); “L” represents the employed labour
force; “K”
represents the stock of capital and “A” represents the total productivity of economic factors.
Impact of workers’
remittances can be identified through “A”. (Waheed and Aleem, 2008; Jawaid and Raza,
2012)
A=g (WR)
Here “WR” represents workers’ remittances. By substituting (2) in (1):
Y= f (L, K, WR)
Through this general production function the empirical model for estimation has been
developed as follows:
Y= β0 + β1 ELF + β2 GFCF + β3 WR+ ε
In the above model Y represents the gross domestic product, β1 represents employed labour
force, β2 represents gross fixed capital formation as percentage of gross domestic product, β3
represents the workers’ remittances and ε represents the error term. It is expected that the sign
of β1 & β2 are positive although the sign of β3 will be identified. Yearly time series data of
Pakistan from 1991 to 2012 has been used. The data source is economic survey of Pakistan
(ministry of finance’s website) and handbook of statistics on Pakistan’s economy (state bank
of Pakistan’s website) The values of gross domestic product (GDP), gross fixed capital
formation (GFCF) have been taken in million rupees while the data of workers’ remittance
(WR) was not available in PKR so its values have been determined by multiplying the
workers’ remittances data (in USD) with average annual exchange rate of USD and PKR

Results and conclusion

This study has been conducted with the view to identify the impact of workers’ remittances
on economic growth. Time series data of twenty two years have been collected from the
official sources of Pakistan’s economy and analyzed with the help of regression model. Gross
domestic product (GDP) has been taken as dependent variable while workers’ remittances
(WR) employed labour force (ELF) and gross fixed capital formation (GFCF) as independent
variable. The results show that there exists a positive relationship between
workers’remittances and economic growth.

Policy recommendation

Besides all the negatives of high migration and the factors which are causing high
migration like poor economic conditions, unemployment, poverty etc it is recommended that
Pakistan should make policies that encourage and motivate the inflow of remittances through
proper channel because some remittances are still sent through hundis due to non friendly
policies. Pakistan should utilize these inflows of remittances efficiently for economic growth
and development. Pakistan should focus on these remittances as these remittances are not
only a source of economic growth but also these remittances are reducing poverty as well as
these remittances are a major source of foreign exchange and helping to overcome the
problem of balance of payment. If these remittances are utilized properly in efficient way
these could help in overcoming the problem of brain drain and high migration and the
effective utilization of these remittances can help in achieving sustainable development.